Wednesday, October 30, 2013

Delay notifying insurer until after $13.5 million verdict probably harmless

An advertising injury case from Posner, with a bonus picture
from the underlying dispute … and it’s not even my birthday.Mead Johnson bought a CGL policy from
National Union, with a $2 million limit for personal/advertising injury, and an
excess liability policy from Lexington with a $25 million limit (both are
subsidiaries of AIG).

PBM’s third lawsuit against Mead Johnson for false
advertising resulted in a jury award of $13.5 million. PBM Products, LLC v. Mead Johnson & Co.,
639 F.3d 111 (4th Cir. 2011). “Mead
wants its insurers to pay that judgment, plus the $15 million settlement that
it made to resolve the [resulting follow-on] class action suit.”PBM’s suit claimed that Mead falsely
disparaged PBM’s less expensive store brand by claiming that it lacked key
lipids that promote brain and eye development.Mead Johnson’s insurance policies expressly covered disparagement as
advertising injury, but Mead Johnson didn’t notify its insurers until after the
damages verdict was handed down.(Why?
Posner doesn’t know.How about:
companies, like Soylent Green, are made of people, and people forget relevant
information all the time.)

Both policies required notice of any claim or occurrence “as
soon as practicable”; the excess liability policy required notice only if a claim
or suit was “reasonably likely” to trigger damages of more than $2 million.The notice provisions entitle insurers to
control the insured’s defense, subject to their fiduciary duty to the insured.

Mead Johnson said that its Director of Risk Management didn’t
learn of the PBM lawsuit until the trial ended, which would be required for its
duty of providing notice to kick in for “occurrences,” per an amendment to the
agreement. The court found it hard to believe that the Director of Risk
Management didn’t know, and anyway a lawsuit was a suit, not an “occurrence.”Posner understood why insureds wouldn’t want
their duty of notice to kick in for any trivial “occurrence,” e.g., “baby cried
after swallowing Enfamil; crack appeared in Enfamil container.”“But it would be absurd to allow a company served
with a summons and complaint or other legal claim to obtain an indefinite
extension of its duty of notice simply by hiding the claim from its Director of
Risk Management,” especially for a claim of this size (PBM asked for $500
million in damages) by a competitor who’d gotten more than $46 million from
Mead Johnson in settling two previous similar suits.Mead Johnson delayed inexcusably in informing
both insurers.

However, this failure allowed the insurers to disclaim
coverage only if they were prejudiced by the late notice.Late notice creates a presumption of harm,
shifting the burden to the insured to show some evidence, but probably doesn’t
shift the burden of persuasion.

The court found National Union unlikely to have incurred
harm from late notice.“Its policy limit
was only $2 million, and we are hard pressed to understand how, had it
conducted the defense of PBM’s suit, it could have obtained either a jury
verdict or a settlement of less than $2 million.”Not only were the damages much higher than
that, but Mead Johnson used the same firm, and even the same lawyer, that
National Union had hired to defend Mead Johnson in PBM’s previous lawsuits.Had it defended Mead Johnson, National Union
would also have had to pay the fees and expenses of the defense, but National
Union didn’t argue it would have paid less, and had it skimped on legal
expenses the ultimate jury verdict might have been higher, allowing Mead
Johnson to claim a breach of fiduciary duty.The court was tempted to direct entry of judgment for Mead on the
National Union/PBM matter, but remanded for factual development on the issue of
harm—at oral argument, National Union’s counsel essentially conceded she couldn’t
show harm, “[b]ut we hesitate to base a decision on a concession made in the
heat of oral argument under a barrage by the judges.”

Lexington’s situation differed: “Conceivably if placed in
control of the defense it could have bargained to a settlement of less than
$13.5 million or, failing that, have presented evidence or argument that would
have convinced the jury to award PBM less.”But the insurers’ joint defense made no real argument about this,
treating Lexington “as the tail to National Union’s kite,” perhaps because of
their shared parent.So the insurers
hadn’t shown that it would have made any difference if they, rather than Mead
Johnson, had hired the same law firm, but also Mead Johnson had only offered
the bare facts that the firm was the same and that $13.5 million was less than
$41.5 million, one of the previous settlement amounts.And the district court erred by holding that
when untimely notice is given by an insured after trial in the underlying suit,
the presumption of harm became irrebuttable.The district court should have said that later notice makes it harder to
rebut the presumption of harm, but the presumption is never irrebuttable.So, remand.

Turning to the second question: was National Union entitled
to decline coverage of Mead Johnson’s claims resulting from the consumer class
action?The advertising injury policy
covered “oral or written publication, in any manner, of material that ...
disparages a person’s or organization’s goods, products or services.” The policy required “pay[ment to the insured
of] those sums that the insured becomes legally obligated to pay as damages
because of ... advertising injury.”

The class members were consumers who bought Enfamil in
preference to cheaper brands of infant formula “on the basis of the same false
representations by Mead Johnson that underlay PBM’s suit.” The court saw this
as a consumer fraud claim, not a product disparagement claim, since no product
sold by the class members was disparaged.Instead, Mead Johnson’s disparagement induced consumers to buy
Enfamil.But Mead Johnson argued that
the policy covered damages for an injury “arising out of” disparaging material.
The court disagreed: the policy said
that damages must arise out of the “offense,” here product disparagement;
damages merely having their origin in disparagement were insufficient.A mere indirect causal link was
insufficient.“Such a chain of equations
can’t be taken literally, for that would imply that the claims in the class ‘arise
out of’ the invention of infant formula.”(Hunh?So what?Is that covered by any policy?Also, the disparagement sure seems like
proximate cause to me, not just but for cause, but the court disagreed.)

Mead Johnson’s argument for “arising out of” went too far:

Suppose that a mother who has been
feeding her baby a store-brand infant formula made by PBM reads Mead Johnson’s
ad which states that “mothers who buy store brand infant formula to save baby
expenses are cutting back on nutrition compared to Enfamil,” or, worse, sees
Mead’s visual-acuity ad, reproduced below, that tells mom that if fed Enfamil
her baby will see an adorable rubber ducky with butterflies, while if fed a
store brand, baby will be able to make out only a blurry yellow monster chased
by bats. Mom, fearing that she has done irrevocable harm to her precious child,
has a nervous breakdown precipitated by Mead’s false, alarmist advertising. If
she sues Mead Johnson for infliction of emotional distress, can Mead require
National Union to defend and indemnify it on the ground that the mother’s
nervous breakdown arose from product disparagement? An affirmative answer—the
answer implied by Mead Johnson’s argument—would, by expanding coverage to
remote consequences, make it very difficult for an insurer to estimate
liability and thus fix a premium for injuries caused by product disparagement.

RT: Except that the consequences at issue in the actual
consumer protection claim are not at all remote. They are, indeed, the very
consequences that the disparagement aimed at: consumers would buy more from
Mead Johnson and less from house brands like PBM, enriching Mead Johnson and
causing damages to PBM.If the damages
to PBM were proximately caused by the disparagement, so too were the damages to
consumers.

In conclusion, the court cautioned that the underlying tort
claim didn’t need to use the magic word disparagement to trigger coverage, as
long as the claim fit the legal definition thereof.

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